The Positive and Negative Impact of Economic Globalisation

Introduction

Long ago, in the era of Pangea, there was one single land mass and each point was reachable without having to cross oceans. There were no geographic boundaries. Then the world became increasingly separated. Until the great conquests of America and distant continents, the world consisted of separate entities. Over time, our world has become more and more interconnected and interdependent. The phenomenon of economic globalisation has accelerated in an unprecedented way as the development of technology has facilitated connections regardless of time and physical location. Economic globalisation has not finished yet; it is more of an ongoing tendency and therefore, from a conservative perspective, economic globalisation can be said to be a matter of degree (Vujakovic, 2009). Some parts of the world are more interconnected and interdependent, while some less-developed parts of the world are lagging behind; however, it is just a matter of time before they shall also be fully integrated into international economic circulation.

Economic globalisation is a highly debated subject and it is apparent that both supporters and detractors can substantiate their argument, offering evidence to prove the legitimacy of their own viewpoints. Transnational or global trade is encouraged by a number of international organizations, such as the WTO (World Trade Organization) and GATT (General Agreements on Tariffs and Trade) and also financial institutions’ increasingly lax practices regarding the international movement of money. In theory, the reduction of tariffs, quotas and virtually all trade restrictions are a mutually beneficial practice. However, opponents of economic globalisation view it as a more multifaceted issue (Sheldon, 2012).

On one hand, the most popular argument against economic globalisation has to do with unfair advantage and the exploitation of developing countries. It also causes domestic issues in developed countries. The entire practice of outsourcing to the Far East (or to countries where production costs are significantly lower than those in the home country) is a consequence of economic globalisation. On the other hand, economic globalisation not only disrupts developing economies, but developed countries as well. One obvious benefit is reduced consumer prices, but has it ever been considered what the costs are? One rudimentary example is the American workers’ fear of moving production to Mexico – in this case, consumers have the benefit of more competitive prices, but at the same time, people lose their jobs. The central question is, what is the optimal balance of economic globalisation?

This paper critically evaluates the merits and controversies of globalisation and how economic integration either benefits or disadvantages different stakeholders. After this, a summary is given to assess whether or not economic globalisation is a curse of blessing. As previously mentioned, classifying globalisation as either a ‘blessing’ or ‘curse’ might be misleading, because the issue is multifaceted. In addition, the initial prescription of this paper is that it is more reasonable to alter globalisation than to terminate it which is seldom, if ever, possible.

The positive impact of economic globalisation – the winners

Beneficiaries of economic growth

Globalisation offers increased business opportunities for both for developed and developing countries (Kuepper, 2013). Developed countries, by having access to foreign markets, can sell their products to a different market. An example of this would be US cars being sold in the European Union. In such cases, if the trade is mutually beneficial as the US producer and also customers benefit from the trade – in case their desire was to drive American cars. Certainly, tariffs and quotas would distort the purchasing of US made cars, but in a highly integrated economic system it would not only be easier to buy foreign products, but their prices are likely to be on par with European-made cars.

On the other side of the coin, developing countries’ economies are mostly based on products that are sought after in developed countries. Developed countries do not or cannot produce these products cost efficiently. Therefore, both parties benefit (Economics Liberty Library, 2011). The cotton-producing countries in Africa can easily find buyers in the developed world; however, domestic subsidies and imposed tariffs on imports for farmers in developed countries make such deals almost impossible. From an economic point of view, it is not warranted that, for example, the US has a competitive advantage in cotton production, yet guided by political interests (which sometimes are irreconcilable with economic principles), they still insist on relying on domestic producers (Debatewise, 2015).

On a slightly on a different topic, Foreign Direct Investments (FDI) by foreign firms in a developing country in the form of infrastructural development can only be possible if markets are open. It helps the transfer of technology and can encourage growth. However, as later discussed, there is a great deal of controversy regarding whether FDIs do indeed help.

Multinational organizations

Multinational organizations (MNOs), often seen as the drivers of globalisation, are beneficiaries but also facilitators of economic globalisation. Their role is also highly controversial, but as 80 per cent of international trade is connected to at least one MNO, it is evident that they are driven by profit. Their responsibility has to be investigated further – as being the largest players in international trade, there have been several attempts to create more social justice (e.g. fair trade, anti-sweatshops, etc.) (Kleinert, 2001).

Access to new markets

The positive impact of new markets was partly elaborated on in previous sections. Theoretically, access to new markets is mutually beneficial – as trade is voluntary, when people buy products, both seller and consumer are better of once the deal is conducted. Developing and developed countries can benefit equally from minimal restrictions on trade; however, their vulnerability to change is very different (Princová, 2010, p. 133).

End users of a product

Globalisation increases possible consumer choices to almost an infinite number – in consumerist societies, the demand for cheaper products is so incisive that in intense competition, even cents would count. Through globalisation, consumers not only receive cheaper prices, but quality (not unquestionably valid for all products) and range of products offered is also improved.

The negative impact of economic globalisation – the losers

Domestic producers of the export country

Returning to the case of US producers: currently their market is protected by trade limitations – quotas and a tariff that make some foreign products seem more expensive. The argument for protectionist policies favours domestic employment and often includes some intangible national pride associated with the production of goods (for example, the turmoil in America directed at policy makers when it turned out that most American flags were made in China). Furthermore, if the US market was opened to foreign manufacturers (who, having a cost advantage would swamp the US market with exports) domestic firms would eventually be bankrupted. In cases where an entire community or region is dependent on a certain commodity (e.g. steel), the poverty caused by globalisation is an undesired societal and political consequence.

Capital flight /tax havens

It is not only physical borders that are disappearing as a consequence of globalisation; financial institutes are also becoming interconnected (Lane, 2012). The movement of money is no longer subject to restrictions, which certainly increases global business opportunities but at the same time, makes domestic economies more vulnerable (With regard to globalisation, a slight paradox occurs when autonomous countries are discussed. The fact that today we are still talking of distinct countries shows how globalisation has a long way to go. While the European Union has attempted to centralize most of its legislative functions, countries still retain relatively high levels of autonomy. If globalisation was fully implemented and the world was one hundred per cent integrated, acting as one entity, this negative impact could be disregarded). Whenever massive money movement takes place, one system (another country, a tax haven) benefits more than the other system (the country experiencing capital flight and/or liquidity crisis). For instance, tax regulations imposed in any country encourage people to withdraw their savings and deposit their money in other countries where taxation is less severe. Because of globalisation, this can be done merely by a click of a computer or through a call to a broker – and billions can be withdrawn from a national economy in a split second.

The excessive capital withdrawal from countries has had a severe impact on the economies of many countries – Greece, the United Kingdom and even the US report billions of dollars worth of illicit financial flows (Buttonwood, 2012).

The financial crisis of 2008, often referred to as the ‘Global Financial Crisis’ affected the entire world. The growth in cross-financial operations and opening the entire world as a financial market yielded massive growth; however, it all came to an end (the bubble burst). While the development of the crisis and its scope cannot be totally attributed to globalisation, the global scale of the crisis was as a result of globalisation. With financial institutions so interconnected, the failure of Lehman Brothers plunged the entire world economy into a depression.

Increases in economic imbalances

It has been widely cited that Western enterprises abuse developing countries and are only interested in making a profit or finding a cheaper means of production, investing only a small fraction of profit back into the country where they are established. In the short term, foreign organizations can provide employment but once they leave, the situation reverts to pre-investment levels. The issue can be examined on a macro and micro level. China, becoming one of the most prominent global economy players, has increased its wealth substantially and claims to be the main producer in many industries. The gap between the richest and poorest countries has only widened since globalisation and African nations have failed to capitalize on globalisation, despite the effects of globalisation being usually reported in a favourable light (Roberts, 2014).

The conclusion to be reached is that globalisation can be beneficial but is not conducive to a socially just system – most of the benefits are realized by developed nations. This is not just an empty statement but a call for the more egalitarian distribution of profits (Sandbrook, 2007). Poverty in Africa is still unresolved; this is not to claim that globalisation itself is the solution, but some of the benefits of a global economy are not evident in Africa. This is possibly due to the fact that developing countries relying more on developed countries’ FDI and their gains is with higher stake. If negotiations between the US and Africa on free trade fail, the US economy would continue to operate as usual; i.e. subsidies will continue to be paid out to farmers. In Africa, with economies relying on agriculture (and no other industries) failure of free trade agreements would be devastating.

Summary

Scholars who are increasingly raising their voices against globalisation have to first consider the case of North Korea – a country completely isolated from world events without any international connections. Living conditions there are catastrophic – but is this because they are not part of the global economy?

Consolidating economic theories with political aspirations and human nature is hardly viable, but as evident from some of the arguments for and against a globalised economy, there are few recommendations possible. Above all, globalisation is often mystified and misunderstood. It is just a tool and it is in fact not the tool but the means of using it that is imperfect. Certainly, there are winners and losers in globalisation, but the status quo only provides benefits to developed countries. Justice requires that each of us sacrifice something in order to fully capitalize on a restriction-free market. Is a global market desirable? Reviewing the financial crisis of 2007–08, it might not be. Today, if the US financial institutes experience the slightest waft of distress, driven by expectations, the entire world’s financial industry would plummet – as happened in the aftermath of the insolvency of Lehman Brothers.

Still, I believe that economic globalisation is desirable, although not in its current form. Both the developed and developing countries have to free themselves of rigid insistence on faulty principles – such as protectionism. Certainly, it will hurt in the first phase, but as the common maxim says, gains inherently come with temporary pains. Demagogue enough but illustrative: the billions of US dollars in subsidies paid out to farmers might as well be used on healthcare or research and development, or the money could be used to provide outplacement services to unemployed cotton farmers. In the meantime, those economies currently suffering from underutilization of resources (e.g. Africa) could decrease poverty at the same time. Unfortunately, national interests are superior to global interest, which is neither bad nor good – it is just inherent in human nature. As globalisation progresses, I presume that people would develop a more global mindset, and will think outside the box and ahead – subsidies paid out to US farmers are a burden and not a measure to save the national economy.

References

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Roberts, D. 2014. China’s Income-Inequality Gap Widens Beyond U.S. Levels. [ONLINE] Available at:http://www.bloomberg.com/bw/articles/2014-04-30/chinas-income-inequality-gap-widens-beyond-u-dot-s-dot-levels. [Accessed 06 May 15].

Sandbrook, R. 2007. Globalization and Egalitarian Redistribution. [ONLINE] Available at:http://www.dissentmagazine.org/democratiya_article/globalization-and-egalitarian-redistribution. [Accessed 06 May 15].

Sheldon, R. 2012. Can Mutually Beneficial Exchanges Be Exploitative?. [ONLINE] Available at:http://fee.org/freeman/detail/can-mutually-beneficial-exchanges-be-exploitative. [Accessed 06 May 15].

Vujakovic, P, 2008. How to Measure Globalisation? A New Globalisation Index (NGI) . Journal of Globalization and Development, [Online]. 1/1, 1-35. Available at:http://www.fiw.ac.at/fileadmin/Documents/Veranstaltungen/Forschungskonferenz/3._foko/Paper_der_Vortragenden/47.PetraVujakovic.New_Globalisation_Index.pdf[Accessed 06 May 2015].